“Industry will welcome this decision as a recognition government understands the need to underpin such a key sector, protect vital supply chains and skilled jobs.

“There are big challenges ahead for the industry, but UK companies should be well placed to turn the shift towards low carbon vehicles into an opportunity. Continuing the scrappage scheme will help industry weather this storm, safeguarding its future and allowing a more orderly transition.”

David Frost, director general of the British Chambers of Commerce, said: “I welcomed the announcement considering that demand is still uncertain, but that has to be it, given the state of the finances.”

Edmund King, president of the AA, pointed out that the scheme has helped to boost the government’s tax take, generating almost enough VAT revenue to make the programme nearly self-financing.

Mr King said: “VAT on a £7,000 car is £913, which with the £55 new car tax compares with the £1,000 government grant for each vehicle.”

He added: “As more people begin to find work, perhaps requiring longer journeys, the chance to upgrade to a newer, more reliable, cleaner, greener, safer car will be crucial. In addition, with VAT returning to 17.5 per cent in the new year, cutting fuel and maintenance costs will be a welcome boost for lower-income drivers.”